Xi’s Saudi trip drops him in middle of bubbling oil dispute

Chinese President Xi Jinping’s Tuesday arrival in Saudi Arabia puts him in the middle of a battle over crude-oil sales between Riyadh and Iran.

Xi arrives in Saudi Arabia

As the largest importer of crude from both Saudi Arabia and Iran, Xi’s visit to the Middle East will show how China’s influence in the region has grown even as China’s demand for oil weakens amid a global price war.

Over the past few months, the frosty relations between Iran and Saudi Arabia have gotten worse, especially with Riyadh’s recent execution of a Shiite cleric that Iran did not want killed. Subsequent protests at the Saudi embassy in Tehran led to the breaking of diplomatic ties between the two nations.

Both nations accounted for nearly one-quarter of Chinese total imports in the first 11 months of 2015, so, China has a strong interest in seeing them tamp down their recent rhetoric.

Gordon Kwan, head of Asia-Pacific regional oil-and-gas research at Nomura, told the Wall Street Journal that Xi would seek promises that Saudi Arabia and Iran are committed to regional geopolitical stability. Given China’s heavy dependence on the region, any supply disruption could prove catastrophic for China’s economy.

“China wants some reassurance that tensions in the Middle East will not continue to escalate, especially between Saudi Arabia and Iran,” Kwan said.

Tehran is getting ready to open the floodgates on oil exports, up to 500,000 barrels a day, as western countries begin lifting the sanctions against Iran over its nuclear program, the Iranians hope to sell most of that to the Chinese.

China “used to be Iran’s largest buyer during the sanctions,” Amir-Hossein Zamaninia, a deputy petroleum minister in Iran, told state media last weekend. “Iran’s priority is to win back its market share.”

Bernstein Research this week projected Chinese total oil demand would grow about 3% this year, or 300,000 barrels a day, compared with around 5% growth in 2015.

Riyadh, which has enjoyed stable demand from China for years, is especially concerned about China’s slowdown in demand. Especially as China imports more oil form Russia, Iraq and other producers.

Overall Chinese import growth of about 9%, according to customs data. Of this, imports from Russia—China’s No. 2 supplier after Saudi Arabia— jumped nearly 30%, while imports of Saudi Arabian crude rose just 2% in the first 11 months last year.